November 2018

AFCA is here and it will cast a wider net

This is article No. 3 in a four-part series on the new Australian Financial Complaints Authority (AFCA), which commences today. We examine the likely impact of AFCA’s increased jurisdictional limits and compensation caps on the behavior of consumers and financial services providers.

The launch of AFCA today is accompanied by increasing speculation about the impact of its broadened jurisdiction not only on financial services disputes but the industry as a whole.

Financial Services Providers (FSPs) may soon find their balance sheet impacted by more, and higher value, Internal Dispute Resolution (IDR) and External Dispute Resolution (EDR) claims. PI insurance premiums are also likely to increase, flowing through into the price of financial services and reduced choice in terms of providers.

Increases to the monetary limits and compensation caps of the predecessor schemes follow on from recommendations by the Ramsay Review to ensure that limits are ‘fit for purpose’ and adequate redress is made available to individual consumers and small businesses.

AFCA’s broadened reach

For firms switching from CIO and FOS, the significant changes to the EDR regime’s jurisdiction are:

Increased compensation caps that AFCA may award;

Increased monetary limits for the value of a dispute that AFCA may hear; and

A new definition of ‘small businesses’ eligible to bring a claim to AFCA.

The new jurisdictional limits are compared with limits under the predecessor schemes in Table 1 below.

Jurisdiction in relation to superannuation disputes will remain the same as that of the Superannuation Complaints Tribunal. AFCA will be able to hear superannuation disputes of any value and compensation is limited to what is required to put the super fund member back in the same position as if the dispute decision had not been made.

Application to wholesale clients

FSPs, in particular ex-CIO members, need to be aware that they may now receive EDR complaints from wholesale clients making claims through AFCA.

In spite of lobbying, AFCA (like FOS) has discretion to consider claims by wholesale clients. CIO Rules had previously excluded wholesale clients; indeed the requirement in the Act for licensees to belong to an EDR scheme was originally introduced with retail clients in mind.

However, the guiding principle in drafting of the AFCA Rules was no material reduction in the scope of the rules when compared with coverage under the existing schemes and that where there was a difference, the higher standard would prevail.

Intended purpose and unintended consequences

The changes to AFCA’s jurisdiction were aimed at ensuring access to redress for consumers and small businesses by bringing compensation caps and monetary limits into line with the current value of financial products and services.

Consumer advocates have welcomed these changes, recognising that many consumers were previously excluded from the regime due to low monetary jurisdictions.

Expanding the definition of ‘small business’ from less than 20 employees to less than 100, also brings a greater proportion of Australian businesses within AFCA’s jurisdiction.

However, the result is a far larger body of potential complainants, some with more complex disputes, who will be encouraged to pursue their claims via the informal EDR regime without the formalities, costs, rules of evidence and overarching obligations that burden the participants of litigation.

A number of industry bodies have also voiced concerns that increasing limits without effective procedural safeguards will not only have unintended consequences for FSPs, but will ultimately increase costs for consumers.

For example, increases to compensation limits and uncertainty surrounding AFCA’s justifications for awarding compensation are likely to be factored into premium pricing for professional indemnity insurance and then passed on to the consumer. Compensation caps could also hollow out the market, with a reduction in small-to-medium financial firms. Over time, this could limit consumer choice to the largest financial services providers with economies of scale.

The larger volume of complex and higher-value disputes brought within AFCA’s jurisdiction might also be counterproductive to the EDR’s mandate to provide a quick and cost-effective mechanism for dispute resolution.

What FSPs need to do

The effect of AFCA’s wider net on the macro financial services market remains to be seen but it is clear that, now more than ever, FSPs need to ensure that they have in place:

A robust IDR procedure to assist with early resolution of disputes;

A sound understanding of the types of disputes to be dealt with through AFCA; and

A knowledge of how the dispute resolution process operates under the new regime.

Our Financial Services team welcomes your questions as the new regime takes effect.

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Mills Oakley is a leading national law firm with offices in Melbourne, Sydney, Brisbane, Canberra and Perth. With over 100 partners and more than 670 staff, we offer strong expertise across all key commercial practice areas.

From origins in Melbourne in 1864, Mills Oakley has grown to become a domestic leader in legal services with a client base of ASX-200 listed companies, mid-sized corporations, the public sector and not-for-profit organisations.